Cost of goods sold (COGS).
In plain English
Cost of goods sold is the accumulated direct cost of the units sold during a period, moved out of inventory and onto the income statement at the moment of sale. It includes raw materials, the labor that makes the product, and factory costs tied to production. It excludes salaries, rent, advertising, and other overhead, which belong in operating expenses. Because COGS follows the sale and not the purchase, inventory bought but unsold stays on the balance sheet as an asset. The inventory costing method a company uses, FIFO or LIFO among others, changes the COGS number whenever prices are moving.
01Why it matters
COGS is the line that decides your gross margin, so misclassifying overhead into it, or out of it, quietly changes the number you and your lender both use to judge the business.
02The math, step by step
Say a store opens the year with 40,000 dollars of inventory, buys 260,000 dollars more, and ends with 55,000 dollars. Cost of goods sold is 245,000 dollars (40,000 plus 260,000 minus 55,000). The 55,000 dollars left over is an asset, not an expense, until it sells.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
COGS is not total spending. It captures only the direct cost of what was sold. The office lease, the sales team, and the ad budget are operating expenses sitting below gross profit. Inventory bought and not yet sold is not in COGS at all.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice